1 Introduction to Financial Statements 1-1

Knowing the Numbers: Columbia Sportswear Company 1-1

1.1 Business Organization and Accounting Information Uses 1-2

Forms of Business Organization 1-3

Users and Uses of Financial Information 1-4

Data Analytics 1-6

Ethics in Financial Reporting 1-7

1.2 The Three Types of Business Activity 1-8

Financing Activities 1-9

Investing Activities 1-9

Operating Activities 1-10

1.3 The Four Financial Statements 1-11

Income Statement 1-12

Retained Earnings Statement 1-13

Balance Sheet 1-14

Statement of Cash Flows 1-16

Interrelationships of Statements 1-17

Elements of an Annual Report 1-20

Appendix 1A: Career Opportunities in Accounting 1-23

“Show Me the Money” 1-24

2 A Further Look at Financial Statements 2-1

Just Fooling Around?: The Motley Fool 2-2

2.1 The Classified Balance Sheet 2-3

Current Assets 2-3

Long-Term Investments 2-5

Property, Plant, and Equipment 2-5

Intangible Assets 2-5

Current Liabilities 2-7

Long-Term Liabilities 2-7

Stockholders’ Equity 2-7

2.2 Analyzing the Financial Statements Using Ratios 2-8

Ratio Analysis 2-8

Using the Income Statement 2-9

Using a Classified Balance Sheet 2-10

2.3 Financial Reporting Concepts 2-14

The Standard-Setting Environment 2-14

Qualities of Useful Information 2-16

Assumptions in Financial Reporting 2-17

Principles in Financial Reporting 2-18

Cost Constraint 2-18

3 The Accounting Information System 3-1

Accidents Happen: MF Global Holdings Ltd 3-1

3.1 Using the Accounting Equation to Analyze Transactions 3-3

Accounting Transactions 3-3

Analyzing Transactions 3-4

Summary of Transactions 3-10

3.2 Accounts, Debits, and Credits 3-11

Debits and Credits 3-11

Debit and Credit Procedures 3-12

Stockholders’ Equity Relationships 3-15

Summary of Debit/Credit Rules 3-16

3.3 Using a Journal 3-17

The Recording Process 3-17

The Journal 3-18

3.4 The Ledger and Posting 3-20

The Ledger 3-20

Chart of Accounts 3-21

Posting 3-21

The Recording Process Illustrated 3-22

Summary Illustration of Journalizing and Posting 3-28

3.5 The Trial Balance 3-30

Limitations of a Trial Balance 3-31

4 Accrual Accounting Concepts 4-1

Keeping Track of Groupons: Groupon 4-1

4.1 Accrual-Basis Accounting and Adjusting Entries 4-2

The Revenue Recognition Principle 4-3

The Expense Recognition Principle 4-4

Accrual versus Cash Basis of Accounting 4-5

The Need for Adjusting Entries 4-5

Types of Adjusting Entries 4-6

4.2 Adjusting Entries for Deferrals 4-7

Prepaid Expenses 4-7

Unearned Revenues 4-12

4.3 Adjusting Entries for Accruals 4-15

Accrued Revenues 4-15

Accrued Expenses 4-17

Summary of Basic Relationships 4-20

4.4 The Adjusted Trial Balance and Closing Entries 4-23

Preparing the Adjusted Trial Balance 4-23

Preparing Financial Statements 4-24

Quality of Earnings 4-24

Closing the Books 4-27

Summary of the Accounting Cycle 4-30

Appendix 4A: Using a Worksheet 4-34

5 Merchandising Operations and the Multiple-Step Income Statement 5-1

Buy Now, Vote Later: REI 5-1

5.1 Merchandising Operations and Inventory Systems 5-2

Operating Cycles 5-3

Flow of Costs 5-4

5.2 Recording Purchases Under a Perpetual System 5-6

Freight Costs 5-8

Purchase Returns and Allowances 5-9

Purchase Discounts 5-10

Summary of Purchasing Transactions 5-11

5.3 Recording Sales Under a Perpetual System 5-11

Sales Returns and Allowances 5-13

Sales Discounts 5-14

Data Analytics and Credit Sales 5-15

5.4 Preparing the Multiple-Step Income Statement 5-16

Single-Step Income Statement 5-16

Multiple-Step Income Statement 5-17

5.5 Cost of Goods Sold Under a Periodic System 5-21

5.6 Gross Profit Rate and Profit Margin 5-23

Gross Profit Rate 5-23

Profit Margin 5-24

Appendix 5A: Periodic Inventory System 5-27

Recording Merchandise Transactions 5-27

Recording Purchases of Merchandise 5-28

Freight Costs 5-28

Recording Sales of Merchandise 5-28

Comparison of Entries—Perpetual vs. Periodic 5-29

Appendix 5B: Adjusting Entries for Credit Sales with Returns and Allowances 5-30

Data Analytics in Action 5-52

6 Reporting and Analyzing Inventory 6-1

“Where Is That Spare Bulldozer Blade?”: Caterpillar 6-1

6.1 Classifying and Determining Inventory 6-2

Classifying Inventory 6-2

Determining Inventory Quantities 6-4

6.2 Inventory Methods and Financial Effects 6-7

Specific Identification 6-7

Cost Flow Assumptions 6-8

Financial Statement and Tax Effects of Cost Flow Methods 6-13

Using Inventory Cost Flow Methods Consistently 6-15

6.3 Inventory Presentation and Analysis 6-17

Presentation 6-17

Lower-of-Cost-or-Net Realizable Value 6-17

Financial Analysis and Data Analytics 6-18

Adjustments for LIFO Reserve 6-21

Appendix 6A: Inventory Cost Flow Methods in Perpetual Inventory Systems 6-24

First-In, First-Out (FIFO) 6-24

Last-In, First-Out (LIFO) 6-25

Average-Cost 6-26

Appendix 6B: Effects of Inventory Errors 6-27

Income Statement Effects 6-27

Balance Sheet Effects 6-28

Data Analytics in Action 6-49

7 Fraud, Internal Control, and Cash 7-1

Minding the Money in Madison: Barriques 7-1

7.1 Fraud and Internal Control 7-3

Fraud 7-3

The Sarbanes-Oxley Act 7-3

Internal Control 7-4

Principles of Internal Control Activities 7-5

Data Analytics and Internal Controls 7-10

Limitations of Internal Control 7-11

7.2 Cash Controls 7-12

Cash Receipts Controls 7-12

Cash Disbursements Controls 7-14

Petty Cash Fund 7-16

7.3 Control Features of a Bank Account 7-17

Electronic Banking 7-18

Bank Statements 7-18

Reconciling the Bank Account 7-20

7.4 Reporting Cash 7-25

Cash Equivalents 7-26

Restricted Cash 7-26

Managing and Monitoring Cash 7-27

Cash Budgeting 7-29

Appendix 7A: Operation of a Petty Cash Fund 7-32

Establishing the Petty Cash Fund 7-33

Making Payments from the Petty Cash Fund 7-33

Replenishing the Petty Cash Fund 7-34

Data Analytics in Action 7-56

8 Reporting and Analyzing Receivables 8-1

What’s Cooking?: Nike 8-1

8.1 Recognition of Accounts Receivable 8-3

Types of Receivables 8-3

Recognizing Accounts Receivable 8-3

8.2 Valuation and Disposition of Accounts Receivable 8-5

Valuing Accounts Receivable 8-5

Disposing of Accounts Receivable 8-13

8.3 Notes Receivable 8-15

Determining the Maturity Date 8-16

Computing Interest 8-16

Recognizing Notes Receivable 8-17

Valuing Notes Receivable 8-17

Disposing of Notes Receivable 8-17

8.4 Receivables Presentation and Management 8-20

Financial Statement Presentation of Receivables 8-20

Managing Receivables 8-21

Evaluating Liquidity of Receivables 8-23

Accelerating Cash Receipts 8-24

Data Analytics and Receivables Management 8-25

Data Analytics in Action 8-46

9 Reporting and Analyzing Long-Lived Assets 9-1

A Tale of Two Airlines: American Airlines 9-1

9.1 Plant Asset Expenditures 9-3

Determining the Cost of Plant Assets 9-3

Expenditures During Useful Life 9-6

To Buy or Lease? 9-7

9.2 Depreciation Methods 9-8

Factors in Computing Depreciation 9-9

Depreciation Methods 9-9

Revising Periodic Depreciation 9-14

Impairments 9-15

9.3 Plant Asset Disposals 9-16

Sale of Plant Assets 9-16

Retirement of Plant Assets 9-18

9.4 Intangible Assets 9-19

Accounting for Intangible Assets 9-19

Types of Intangible Assets 9-20

Research and Development Costs 9-22

9.5 Statement Presentation and Analysis 9-23

Presentation 9-23

Analysis 9-25

Appendix 9A: Other Depreciation Methods 9-30

Declining-Balance Method 9-30

Units-of-Activity Method 9-31

Data Analytics in Action 9-55

10 Reporting and Analyzing Liabilities 10-1

And Then There Were Two: Maxwell Car Company 10-1

10.1 Accounting for Current Liabilities 10-3

What Is a Current Liability? 10-3

Notes Payable 10-3

Sales Taxes Payable 10-4

Unearned Revenues 10-5

Current Maturities of Long-Term Debt 10-6

Payroll and Payroll Taxes Payable 10-6

10.2 Characteristics of Bonds 10-9

Types of Bonds 10-9

Issuing Procedures 10-10

Bond Trading 10-10

Determining the Market Price of a Bond 10-11

10.3 Accounting for Bond Transactions 10-14

Issuing Bonds at Face Value 10-14

Discount or Premium on Bonds 10-14

Issuing Bonds at a Discount 10-15

Issuing Bonds at a Premium 10-17

Redeeming Bonds at Maturity 10-19

Redeeming Bonds Before Maturity 10-19

10.4 Presentation and Analysis 10-20

Presentation 10-20

Analysis 10-22

Appendix 10A: Straight-Line Amortization 10-26

Amortizing Bond Discount 10-26

Amortizing Bond Premium 10-28

Appendix 10B: Effective-Interest Amortization 10-29

Amortizing Bond Discount 10-29

Amortizing Bond Premium 10-31

Appendix 10C: Accounting for Long-Term Notes Payable 10-32

11 Reporting and Analyzing Stockholders’ Equity 11-1

Oh Well, I Guess I’ll Get Rich: Facebook 11-1

11.1 Corporate Form of Organization 11-3

Characteristics of a Corporation 11-3

Forming a Corporation 11-6

Stockholder Rights 11-7

Stock Issue Considerations 11-8

Corporate Capital 11-10

11.2 Accounting for Common, Preferred, and Treasury Stock 11-12

Accounting for Common Stock 11-12

Accounting for Preferred Stock 11-13

Accounting for Treasury Stock 11-14

11.3 Accounting for Dividends and Stock Splits 11-16

Cash Dividends 11-16

Dividend Preferences 11-19

Stock Dividends 11-21

Stock Splits 11-22

11.4 Presentation and Analysis 11-24

Retained Earnings 11-24

Retained Earnings Restrictions 11-25

Balance Sheet Presentation of Stockholders’ Equity 11-26

Analysis of Stockholders’ Equity 11-28

Debt versus Equity Decision 11-29

Appendix 11A: Entries for Stock Dividends 11-32

Data Analytics in Action 11-55

12 Statement of Cash Flows 12-1

Got Cash?: Microsoft 12-2

12.1 Usefulness and Format of the Statement of Cash Flows 12-3

Usefulness of the Statement of Cash Flows 12-3

Classification of Cash Flows 12-3

Significant Noncash Activities 12-4

Format of the Statement of Cash Flows 12-5

12.2 Preparing the Statement of Cash Flows—Indirect Method 12-6

Indirect and Direct Methods 12-7

Indirect Method—Computer Services Company 12-7

Step 1: Operating Activities 12-9

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method 12-12

Step 2: Investing and Financing Activities 12-13

Step 3: Net Change in Cash 12-15

12.3 Analyzing the Statement of Cash Flows 12-17

The Corporate Life Cycle 12-17

Free Cash Flow 12-19

Appendix 12A: Statement of Cash Flows—Direct Method 12-22

Step 1: Operating Activities 12-24

Step 2: Investing and Financing Activities 12-28

Step 3: Net Change in Cash 12-30

Appendix 12B: Worksheet for the Indirect Method 12-30

Preparing the Worksheet 12-31

Appendix 12C: Statement of Cash Flows—T-Account Approach 12-35

Data Analytics in Action 12-61

13 Financial Analysis: The Big Picture 13-1

It Pays to Be Patient: Warren Buffett 13-2

13.1 Sustainable Income and Quality of Earnings 13-3

Sustainable Income 13-3

Quality of Earnings 13-7

13.2 Horizontal Analysis and Vertical Analysis 13-9

Horizontal Analysis 13-10

Vertical Analysis 13-12

13.3 Ratio Analysis 13-15

Liquidity Ratios 13-16

Solvency Ratios 13-17

Profitability Ratios 13-17

Financial Analysis and Data Analytics 13-18

Comprehensive Example of Ratio Analysis 13-18

Appendix A Specimen Financial Statements: Apple Inc. A-1

Appendix B Specimen Financial Statements: Columbia Sportswear Company B-1

Appendix C Specimen Financial Statements: Under Armour, Inc. C-1

Appendix D Specimen Financial Statements: Amazon.com, Inc. D-1

Appendix E Specimen Financial Statements: Walmart Inc. E-1

Appendix F Time Value of Money F-1

F.1 Interest and Future Values F-2

Nature of Interest F-2

Future Value of a Single Amount F-3

Future Value of an Annuity F-5

F.2 Present Values F-8

Present Value Variables F-8

Present Value of a Single Amount F-9

Present Value of an Annuity F-11

Time Periods and Discounting F-13

Present Value of a Long-Term Note or Bond F-13

F.3 Capital Budgeting Situations F-16

F.4 Using Technological Tools F-18

Present Value of a Single Sum F-19

Present Value of an Annuity F-20

Future Value of a Single Sum F-21

Future Value of an Annuity F-22

Internal Rate of Return F-22

Useful Applications F-23

Appendix G Reporting and Analyzing Investments G-1

G.1 Accounting for Debt Investments G-2

Why Corporations Invest G-2

Accounting for Debt Investments G-2

G.2 Accounting for Stock Investments G-4

Holdings of Less Than 20% G-5

Holdings Between 20% and 50% G-6

Holdings of More Than 50% G-7

G.3 Reporting Investments in Financial Statements G-9

Debt Securities G-9

Equity Securities G-12

Balance Sheet Presentation G-13

Presentation of Realized and Unrealized Gain or Loss G-14

Company Index I-1

Subject Index I-5

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